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Operational, Talent and Data Gains: The New Dodd-Frank Benefits

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) imposes significant challenges on banks to comply with regulations designed to reduce risk and improve transparency. Forward-thinking executives, however, are finding ways to incorporate competitive tactics into compliance efforts to bolster growth and risk management efforts. “The new mindset is changing the way banks manage capital and operational efficiency, recruit and retain talent, and view data and transparency,” says Bob Contri, vice chair and U.S. Banking & Securities leader for Deloitte LLP. Within each of these three operational areas, banks should consider setting strategic priorities and goals as a way to capture the benefits of advanced compliance planning. It’s feasible for banks to use the Dodd-Frank requirements to their advantage to pursue strategic efficiency, win the war on talent, foster data transparency and ultimately grow the business.

Pursue Strategic Efficiency

Besides Dodd-Frank compliance, there are plenty of reasons why banks should want to improve efficiency by bolstering their balance sheets, including addressing operational issues such as diminishing earnings, greater cost pressures, liquidity concerns and mandates to hold higher levels of capital. “Much of the low-hanging fruit was picked years ago, so the balance sheet fix should go well beyond simple cost-cutting,” says Adam Schneider, chief advisor of the Deloitte Center for Financial Services and a principal at Deloitte Consulting LLP. “It demands strategic efficiency, which means asking tough questions about the business,” he adds.

Such questions can include: Is the bank squeezing as much value as possible from its most profitable businesses? Should the organization acquire new lines of business, and which lines should be jettisoned? Should the bank invest more in low performers to achieve the desired results?

By analyzing different business lines across the enterprise and then deciding whether to improve or divest lower-performing ones, banks can significantly improve their use of capital. “A more efficient balance sheet and a more deliberate capital management program can also play a significant role in determining how much capital banks need to hold for each business line,” says Kevin Blakely, a senior advisor with Deloitte & Touche LLP in the Governance, Risk and Regulatory Strategies practice. “For example, whether a golf course loan is considered a real estate or operating loan will determine the capital requirement—and the amount may not be the same. With improved systems in place, banks can weigh such cases to make efficient use of capital,” notes Mr. Blakely, who served as a chief risk officer in the banking industry and is the former head of the Risk Management Association.

Banks should consider, in particular, the following steps to enhance strategic efficiency:

Reassess the business portfolio by conducting a detailed, objective assessment of the viability of each business in light of the greater capital and regulatory burdens of Dodd-Frank.

Find ways to improve productivity—from both capital and operational perspectives—across customer and product segments and locations.

Eliminate redundant legacy operations by embracing shared service models to cut costs and help increase standardization.

Make better use of new technologies, such as cloud computing, to lower costs through economies of scale.

Wage a Talent War

Financial institutions will need to cope with the talent risk created by the Dodd-Frank incentive compensation schemes that many believe will drive some top candidates to other industries. Under the rules, significant components of incentive compensation are required to be risk adjusted, or deferred, based on longer-term outcomes, and balanced based on inherent risks. Additionally, financial institutions can use forfeitures during deferral periods to recover pay from employees who exposed companies to imprudent risks.

“In this environment, banks may need to become more competitive in hiring and retaining talent,” says John Kocjan, a principal with Deloitte Consulting LLP. “Banks could try new approaches, such as using analytics to look closer at what kind of talent they are attracting and who they are losing,” he adds. Banks should consider such questions as: Do employees who are strongly aligned with professional or social networks perform differently than others? Do business recruits from certain schools have a different impact than others? Conducting this type of analysis could help banks strategically rethink their hiring tactics in terms of what they can offer recruits regarding culture, innovation, motivation, rewards and leadership development.

Banks may also need to provide alternatives to compensation that give new employees a greater sense of belonging, increased job satisfaction and opportunities for mobility. Banks should also consider making a cultural shift toward a shared-outcomes approach in which employees are more engaged in the company’s interests and its long-term effectiveness.

Following are a few human resources (HR) strategies that can help banks win the talent war:

Reset the “employee value proposition” by emphasizing ideals and rewards that are aligned with the goals of bank employees and job candidates—or risk falling behind other hiring companies. The value proposition should be clear and woven into the recruiting strategy, compensation plan and corporate communications material.

Reassess non-revenue employees with regard to compensation and costs to determine if the costs are uneven across the enterprise, based on where employees are located and/or their compensation compared to intercompany peers.

Transform HR service delivery, an initiative that can help companies effectively and efficiently manage the size and scale of a workforce.

Double Down on Data Transparency

After years of growing through acquisitions, some banks are left with hundreds of disparate information systems across their enterprises. Integrating these systems can be difficult as many banks begin to grapple with data assets that have different underlying descriptions and definitions.

Nevertheless, integration efforts may push banks to reconcile the data, which could lead to positive results. For example, it may be easier to report accurately which commercial real estate assets a bank owns once an integrated system recognizes that one business unit describes commercial real estate using different terminology than another business.

Banks should also consider standardizing data assets so they can report and monitor systemic risk, use analytics to help management and boards improve decision-making, and improve back-office operations. “Banks should consider leveraging data from information systems set up solely for regulatory purposes,” says Christopher Spoth, a director with Deloitte & Touche LLP. “These changes could provide banks with a better understanding of what’s on their balance sheets, which businesses are performing well and which are losing money,” he adds.

Banks can foster data transparency by considering the following strategies:

Develop an overall data governance program that targets enterprise architecture so companies can centralize and standardize sources of specific reference data. This may help establish a source of customer identifiers and settlement instructions, product identifiers and tags for trades that flag counterparty risk.

Track trades and positions by legal entity counterparty. Companies can improve systems to better track trades and positions by legal entity within their organization and with counterparties.

Establish a continuous process model with virtual reference data stores that leverage one source of data, customized to a data mart.

The regulatory challenges posed by Dodd-Frank have created a lot of pain for banks in a short amount of time. But those that look beyond mere compliance to find opportunity may find plenty. “While the timing may be challenging, in some cases the legislation creates advantages that can pay big dividends over the next few years and beyond,” says Mr. Contri. However, for many institutions, capturing benefits will require a major shift in their approach. Meetings that used to start with the question, “What do we have to do to satisfy this requirement?” instead should begin with, “How can we use this requirement to our advantage?” “That’s a far cry from what’s happening at many banks today. But it’s exactly the approach that banks should consider adopting to win in the future,” observes Mr. Contri.

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About Deloitte Insights

Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.